Commercial Vehicle Group's (CVGI) CEO Richard Lavin on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Commercial Vehicle (CVGI)

Commercial Vehicle Group, Inc. (NASDAQ:CVGI)

Q2 2014 Earnings Conference Call

August 8, 2014 10:00 A.M. ET

Executives

Terry Hammett - Head, Investor Relations

Richard P. Lavin - Chief Executive Officer

C. Timothy Trenary - Chief Financial Officer

Analysts

Robert Kosowsky - Sidoti & Company

Joe Vruwink - Robert W. Baird & Co.

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2014 Commercial Vehicle Group Incorporated Earnings Conference Call. My name is Denise and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Mr. Terry Hammett, Head of Investor Relations. Please proceed.

Terry Hammett

Thank you, Denise and welcome everyone to our conference call. Rich Lavin, our CEO will give a brief company update and Tim Trenary, our CFO will then take you through our second quarter 2014 results. We will then answer questions.

I would like to remind you that this conference call is being webcast. It may also contain forward-looking statements including, but not limited to expectations for future periods regarding market trends, cost saving initiatives and new product initiatives among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to the economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

I would now like to turn the call over to Rich.

Richard P. Lavin

Thanks Terry. Good morning and welcome to our call. As mentioned in the earnings release we issued last night our sales continued to benefit from higher production volumes by North American heavy-duty truck OEMs and in the global construction markets we serve. We are pleased to report that our revenues improved by $17.1 million or by 8.6% over the prior year period. And that gross profit and operating income improved by $5.3 million and $6.9 million respectively.

Conversion of the higher sales and operating income during the quarter exceeded our historical conversion rate as a result of in part greater cost discipline across the organization. Demand for medium and heavy duty truck products in North America benefited from continuing comparatively strong build rates during the second quarter of this year. Our revised forecast for the 2014 North American heavy duty truck build is in the range of 280,000 to 300,000 units. We believe this trend is being sustained by growth in freight volumes, replacement of ageing vehicles, and continued optimism about the U.S. economy.

As previously indicated we evaluate our manufacturing capacity utilization and footprint in the normal course of our business. We have the manufacturing capacity and supply base in place to meet the elevated production volumes we are experiencing in North America and therefore we are well positioned to meet our customers supply demands.

China, a key market in our organic growth strategy is expected to see GDP growth of about 7.5% in 2014. Targeted economic stimulus measures, the so called mini stimulus are being introduced that are expected to begin to favorably impact infrastructure and construction in the second half of the year. Therefore we continue to believe that the Chinese construction equipment market will provide CVG with market penetration and growth opportunities as the effects of the mini stimulus play out.

We also believe that as China's economy continues to be driven more by domestic consumption than by foreign direct investment and capital formation, the need for roads and highway trucks to transport goods is expected to continue to increase and drive demand for construction equipment and heavy-duty trucks.

We believe our global construction markets will continue to experience modest improvement for the remainder of the year. However, we also believe the European economy will remain relatively flat throughout the remainder of the year as will the construction and heavy duty truck industries in Europe.

We continue to focus on the agriculture equipment market especially in North America. Agriculture is a market we believe offer significant growth potential for us through improved market penetration. We intend to allocate resources to increase the sale of our products in this market both in North America and globally.

I would like to mention that during the quarter our wire harness facility in the Czech Republic received the Supplier Quality Excellence Process Award from Caterpillar, thereby meeting the high quality standards set by Caterpillar for its suppliers. In addition, several facilities including our Shadyside Ohio facility received the PACCAR Quality Achievement Award for three consecutive years, an extraordinary accomplishment that reflects well on these facilities, the Global Truck & Bus division, and our entire organization.

Our ability to compete for and sustain business with our customers begins with operational excellence and these facilities have contributed to excellence at CVG. Within CVG we continue to refine our global business organization as evidenced by the recently announced realignment of our aftermarket business. The North American aftermarket business will now report to Pat Miller, in his capacity as President of Global Truck & Bus.

Geoff Perish, Asia-Pacific Managing Director will assume responsibility for the APAC aftermarket business and Kevin Lane, MD for Europe, the Middle East, and Africa will assume responsibility for the EMEA aftermarket business. The recent change in our executive leadership team to include Managing Directors in both the APAC and EMEA geographies created an opportunity for us to now more readily address the unique local needs of our aftermarket customers in all of the geographies we serve.

We also recently announced that Ulf Lindqwister joined CVG on August 4th as Chief Administrative Officer with responsibility for among other areas Research and Development, Supply Chain and Logistics Management, and Corporate Business Development. Ulf comes to CVG from Caterpillar where he served most recently as Manager of Growth, M&A, and External Relationships for CAT Electronics. His skill set and experience are well suited to more effectively focus our product design and manufacturing and operating cost structure initiatives to better support our product line management structure. Ulf is an outstanding addition to a strong leadership team focussed on delivering the industry leading results and his addition will allow me to spend more time addressing our customer's needs and strengthening customer relationships.

In early June we announced the appointment of Roger Fix and Harold Bevis to the Board of Directors. Mr. Fix currently serves as the Non-Executive Chairman of the Board of Directors of Standex International Corporation. He was the President and Chief Executive Officer of Standex from 2003 to 2014. Mr. Bevis has served as a Director and as President and Chief Executive Officer of Xerium Technologies Incorporated since August 2012. Both gentlemen are very knowledgeable and provide years of operational, manufacturing, and other experience. They are fine additions to the Board of CVG.

As you may recall, during 2013 we conducted an in depth evaluation of the company. This evaluation gave rise to a number of key initiatives intended to enhance the company's growth prospects and profitability. I believe our improved financial performance in 2014 is in part a reflection of this work. Having addressed these near-term needs of our company, it is now time to turn our attention to our longer-term strategy what we refer to as CVG 2020.

After a number of months in the making, the CVG 2020 strategic plan is taking shape and the strategic planning process is coming to a close. I look forward to sharing CVG 2020 with you in the not too distant future at our Analyst Day Conference early this fall.

In closing, I would emphasize that we are happy with our Q2 results. Our second quarter results are a reflection of where we are early in our journey to improve CVG's competitiveness in global market place, to enhance our customer relationships, and to improve our financial performance for the long-term. Again, thanks to everybody for calling in and with that I will turn the call over to Tim for comment on our financial performance.

C. Timothy Trenary

Thank you, Rich. As Rich mentioned and as compared to the second quarter of 2013, our financial results continued to benefit from increased build rates by North American heavy-duty truck OEMs and by increased construction equipment production volumes in the global construction markets we serve.

Our second quarter 2014 revenues were $216 million, an increase of $17.1 million or 8.6% compared to the second quarter of 2013. On a sequential basis that is compared to the first quarter of 2014, our revenue increased by $17.9 million or by 9%. Gross profit in the second quarter was $28.2 million compared to gross profit of $22.9 million in the second quarter of 2013. This $5.3 million improvement in gross profit represents a 31% conversion of revenues into gross profit.

Additionally our gross profit margin in the second quarter of 2014 improved to 13%. Operating income in the second quarter was $9 million compared to operating income of $2.1 million in the second quarter of 2013. This represents a $6.9 million improvement in operating income from the prior year period. Conversion of sales and operating income in the quarter compared to the prior year period benefited in part by $2.5 million in costs associated with the executive change over in the second quarter of 2013.

Before giving effects of these costs and as Rich mentioned at the outset of our call today, conversion of the higher sales and the operating income during the quarter exceeded our historical conversion rate as a result of cost discipline across the organization.

SG&A for the quarter was $18.7 million, was generally consistent with historically normal SG&A levels and compared favorably to the $20.3 million of SG&A in the second quarter of 2013 which included the cost of the executive changeover. Net income for the quarter was $2.7 million or $0.09 per diluted share compared to a net loss of $1.7 million or a loss of $0.06 per diluted share in the second quarter of 2013.

Depreciation was $4.2 million in the second quarter and amortization was $400,000. Second quarter capital spending was $3.3 million. We expect increased capital spending throughout the remainder of the year as we invest in our facilities, sales growth, operational excellence, and other activities. An income tax provision of $1.1 million was recorded in the three months ended June 30, 2014 compared to an income tax benefit of $1.4 million for the prior year period.

The company's effective tax rate in the second quarter continued to be adversely affected as certain favorable tax laws including the research and development tax credit were not extended by Congress. The tax rate was also impacted by valuation allowances in certain of our foreign subsidiaries.

We finished the quarter with $70.3 million of cash and approximately $37 million of availability from our ABL facility therefore we have liquidity of over $100 million. To conclude generally we see positive economic factors at our key global markets and industries. The continued growth in our top line during the quarter is encouraging as is the cost discipline we were able to maintain in a rising North American heavy duty truck market. And as Rich mentioned we look forward to rolling out our strategic plan CVG 2020 early this fall. With that we will open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Robert Kosowsky with Sidoti. Please proceed.

Robert Kosowsky - Sidoti & Company

Hey, good morning guys, how are you doing?

Richard P. Lavin

Great Rob, how are you?

Robert Kosowsky - Sidoti & Company

I am pretty good. First question is on the sequential margin expansion. I was wondering if there are any impacts, I thought you might have had a little bit better I guess sequential incremental margins coming here, I wanted to know if there are any pros and cons bridging the two quarters, if you can kind of shed some light on that?

C. Timothy Trenary

Okay, sequential, the first quarter of 2014 compared to the second quarter.

Robert Kosowsky - Sidoti & Company

Yes.

C. Timothy Trenary

Yeah, okay. No there was nothing really dramatic different there between the two quarters Rob. I have the conversion at well within the band that we generally expect. We generally look for you know, 20% to 25%. I have it at 22%. So it is well within the boundaries that we expect. I mean, if I said there was nothing dramatically different as between the two quarters there -- the vagaries of the manufacturing business in any given period compared to another mix for example currency fluctuations, some impact not much but some impact in the second quarter on our manufacturing efficiency associated with the ramp up of the truck build in the second quarter in North America. And then of course as we previously mentioned we are in the process of moving our production out of the facility in the northwest to -- other facilities in the company. So in the course of preparing for that move there is bank builds etc. So there is some modest effects on manufacturing efficiency there. But look, I mean 22% conversion sequentially well within our band and I think satisfactory.

Robert Kosowsky - Sidoti & Company

Okay and then can you talk about how you are I guess -- you are looking at SG&A for the back half of the year, there is two quarters now at about $18 million to $18.5 million is that sustainable rate we should be looking at.

C. Timothy Trenary

I think the $18 million that we had in the second quarter is first of all it is indicative setting aside sort of one off items like the executive change over last year. Setting those aside and also setting aside as we have described before some of the actions that were taken in the third quarter last year to make room for some more value accretive spend that we started to put in place in the fourth quarter setting those sort of fluctuations aside, a spend rate of $18 million on a quarterly basis not only reflects the historical -- the company's historical spend rates of about $800 million in sales or so but I think -- I think that's basically -- it reflects historical rates and I don’t see a lot of fluctuation going forward in the near term.

Robert Kosowsky - Sidoti & Company

Okay and then finally back in the operations, how do you feel about being able to handle another say 10% increase in truck reduction rates that might be coming given the strong July orders that we saw?

C. Timothy Trenary

As Rich mentioned we have the infrastructure in place and the facilitization and more specifically the capacity -- manufacturing capacity to not only handle the current build rates but also handle build rates within reason in excess of the current build rates. So we don’t see that as an issue and frankly it would be welcomed.

Richard P. Lavin

Yeah, Rob this is Rich. I would only add that Pat Miller in the Global Truck & Bus division had performed very well during the first half in a rising industry. I mean, we haven’t missed customer orders as a result of rising demand and so I think they are well positioned over the last two quarters to meet the increasing customer demand. We are not concerned about that.

Robert Kosowsky - Sidoti & Company

That's good to hear. And finally kind of longer term growth question. I know you are trying to expand a little more into agriculture and also aftermarket, I am wondering if there is any low hanging fruit in any of these industry verticals and if you see these as being materially bigger portions of those -- of the business in say five years?

Richard P. Lavin

Yeah Rob, we will speak to that I think in some detail during the Analyst Day what we call CVG 2020 but I can tell you that we have significant opportunity for growth in a couple of different industries, in a couple of different regions. Agriculture is probably at the top of the list. So, we do see opportunities for early gains but we will be more specific in talking about our plans to address those opportunities during our CVG 2020 Day in the fall.

Robert Kosowsky - Sidoti & Company

Alright, thank you very much and good luck.

Richard P. Lavin

Thanks Rob.

C. Timothy Trenary

Thanks Rob.

Operator

(Operator Instructions). Our next question comes from David Leiker with Baird. Please proceed.

Joe Vruwink - Robert W. Baird & Co.

Hi guys, good morning. This is Joe Vruwink on line for David.

Richard P. Lavin

Hi, Joe.

Joe Vruwink - Robert W. Baird & Co.

I wanted to kind of follow-up on the gross profit question. If you look at your current revenue levels they seem to be within call it 5% to 10% of the highs you are seeing in 2011 and 2012 and I think even where the OE production schedules are on truck, you know, you are going to be in pretty good position to get pretty close to those levels again. If I look at gross margins now, they are about 200 basis points below on a same comparison to kind of at 2011, 2012 timeframe. Can you may be help bridge the gap between these two time periods and anything notable that comes to mind that might be contributing to the difference?

C. Timothy Trenary

Yeah Joe, appreciate the question. As I think you know, I wasn’t at the company in 2011 or 2012. So I am not intimately familiar with the cost structure at that point in time. So I am going to be -- I am not going to be helpful in sort of getting that bridging done for you. I would say this that given the company's current cost structure going forward as we sit here today, as the sales fluctuate up or down, as I said in answer to Rob's call we look for conversion in the range of 20% to 25%.

Joe Vruwink - Robert W. Baird & Co.

There is maybe, okay, there is nothing maybe on a mix basis, obviously cab structures that carry a little bit better margin, there is probably some offsets from that. But when you look at kind of footprint utilization or product mix, there is nothing obvious there that, that would be driving some near term fluctuations?

C. Timothy Trenary

Well, not to my knowledge but understanding that I -- again I wasn’t at the company in 2011 or 2012 so it is difficult for me to be real specific in that regard.

Joe Vruwink - Robert W. Baird & Co.

Okay, I understand and can appreciate that. Maybe switching gears a bit, on the China construction commentary, so it seems like you guys are a little more positive just on the opportunity in that region, rolled out to some of the comments out of your OE customers in the quarter. Would you say that's more of a CVG phenomenon so you can see the new business opportunities you have in the region, do you know what you are going to be launching in the second half that drives that type of backdrop. Or are you actually seeing growth in your build schedules today on some of your existing programs?

Richard P. Lavin

Yeah, this is Rich. It is really a question of what we are projecting later in the second half as a result of some of the stimulus measures that were taken by the Chinese government. You know we are seeing a stable demand level right now in China. Although I should say that working with a couple of OEMs in China we have seen some building finished goods inventory on their part. So, in the short-term we are not going to see effects of the mini-stimulus but I will say in the back end of the second half of this year we should begin to see some improvement on the basis of the effects of those stimulus measures from the Chinese government.

Joe Vruwink - Robert W. Baird & Co.

And maybe from a cost side Rich, are you happy with the resources you have committed to China given kind of the new business growth outlook or some of this incremental CAPEX being planned, is that to get more feet on the street so to speak in China to support that growth?

Richard P. Lavin

Yeah, good question. I would say that with Geoff Perish we have got someone leading our China business who is deeply knowledgeable of China and of our industries. So we have got good leadership. We are planning to add resources, make additional investments in China as part of our CVG 2020 plan and we are certainly as I mentioned earlier prepared to share some of that detail with you when we roll the plan out in the fall. But right now I think we are satisfied with where we stand in terms of resources dedicated to the opportunity at this stage but we are going to be talking about I would say significant growth plans for China as a part of CVG 2020. We look forward to sharing those plans with you later in the fall.

Joe Vruwink - Robert W. Baird & Co.

Great, I will leave it there, looking forward to the event. Thanks guys.

Richard P. Lavin

Thanks Joe.

Operator

We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed.

Richard P. Lavin

This is Rich Lavin. Again thanks to everybody for calling in. I want to emphasize that we are pleased with second quarter results. We are by no means satisfied to see this quarter as a step in the direction of building highly competitive CVG going forward. And as we have mentioned several times we look forward to sharing our CVG 2020 plan with you later in the fall. Thanks for calling in everybody.

Operator

This concludes today's conference. You may now disconnect. Have a great day.

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Commercial Vehicle (NASDAQ:CVGI): Q2 EPS of $0.09 beats by $0.01. Revenue of $216M (+8.6% Y/Y) beats by $11.63M.